Oil cools on strong dollar and suffering economies

Abu Dhabi: Oil and gas prices continue to slide worldwide, for two reasons.

Firstly, dollar has streng-thened against the assumption that it would decline against other major currencies.

While the US economy is weakening, other econ-omies are likely to do even worse, with China as the major exception due to its continuing trade surplus for low and moderate cost finished goods. Amid the current liquidity crisis and with so many assets dollar-denominated, world demand for dollars has sharply risen.

With a stronger US dollar, commodity prices have fallen in nominal terms but not in real (adjusted for inflation) terms. This has reduced the actual value of crude oil's price decline over the past two weeks.

Secondly, the largest component of Chinese GDP is now consumer demand at 42 per cent.

While still far lower than the US GDP's 70 per cent consumption share, it is increasing, which changes the price elasticity of demand for crude oil imports.

But with its vast expansion in public infrastructure, China is likely better positioned than the US to weather high oil and energy prices.

The New York Mercantile Exchange's West Texas Intermediate benchmark crude ended the week at $93.88, after finishing last week at $106.89, a price decline of 12 per cent in one week.

The DME Oman heavy sour benchmark finished the week at $88.42 (OSP), finishing in after-hours trading at $85.15.

Last week the contract closed at $96.65. Doubts about Chinese demand will continue to dominate the DME (and the Opec basket) price numbers.

For Nymex and DME the back oil contracts are higher, indicating that the belief still exists for increasing oil demand in the coming years.

The writer is an associated professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.